NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Last month, Wired hosted a conference called “Disruptive by Design,” the first conference that I know of focused mostly on disruptive business models. In talking about Disruptive Leadership, I have often emphasized that a disruptive business model must accompany the disruptive innovation when addressing the bottom of the pyramid. CK Pralahad talks in detail about this in the Fortune at the Bottom of the Pyramid.

One of the featured speakers was Jeff Bezos, CEO of Amazon. Given the success of Amazon’s Kindle and its impact to the “business model” of the publishing industry, that was the primary topic of discussion. You can watch Jeff’s entire talk on Wired’s conference site (as well all the other speakers). I myself got a Kindle a few months ago and haven’t read a physical book since. I absolutely love it. It isn’t just the slick design (it looks and feels like an Apple Ipod/Iphone), but I was floored by how easy and fast it was in getting it setup and buying and downloading my first e-book. It literally took me two minutes from start to finish, from opening the package, going online (through their Whispernet wireless service in a parking lot somewhere), searching for a book I wanted, buying it, downloading it, and getting to the first chapter).

So what does this have to do with “next billion?” The device is expensive at %7E$400 — far out of reach of most. Amazon’s online store is primarily a mature market phenomenon.

The backstory behind the Kindle had everything to do with the BoP. While I was running the emerging markets product group at Intel, my team was working with Amazon back in 2006 on a prototype e-book using e-Ink (the screen technology that allows e-books like the Kindle to have no backlight and use virtually no power).

An individual in my group (we’ll call him “Al”) spearheaded the e-book project using Intel’s low power Xscale processor (which has since been sold off to Marvell). The idea was to create an ultra-low power device, using e-Ink’s display technology, Intel’s low cost/low power Xscale processor, and partner with Amazon and others to provide inexpensive e-book readers for under-served schools in developing areas. Amazon was just beginning to look into e-readers as a new adjunct business model to their mainstream online retail business.

I remember the first demo “Al” gave me … it was an “engineering” sample, which means it was a jumble of circuits, wires and boards connected to the e-Ink display. I recall being utterly amazed at the clarity of the display with pictures and text, requiring no backlight. I saw huge potential in creating a sub-$99 device (the Xscale processor was sold for next to nothing compared to the cheapest Celeron.) Since content was mostly text based, storage space would not an issue so small-form factor, low-cost flash storage could be used.

I felt it truly was a disruptive innovation. If we could make it ultra-low cost and easy to use, and start out with a single-purpose application (e.g. reading ) with an extremely basic user interface, I envisioned tattered, dated text books in rural schools replaced with devices that could last for days (not hours), bringing the latest content to children worldwide.

The huge obstacle I saw was the business model required to delivering the content. Intel was not in this business. There are 1000’s of local education content providers worldwide. The complexities of localizing content seemed overwhelming. Forget about the 100’s of languages, think about the 1000’s of dialects worldwide. Amazon, with its established relationships with publishers, and years of expertise in e-commerce and online delivery, seemed like a perfect partner to help us conquer the business model, even if they didn’t have the emerging market part figured out. I figured we could start in a phased approach, targeting both mature and emerging countries. Charge more in mature markets for more sophisticated devices/services to subsidize some of the lower margins in developing countries.

Yet alas, this project was not to be. Not because of the daunting obstacles I mention above. But because of the “innovator’s dilemma,” made famous by Clayton Christensen, but described best here in a few sentences:

“The problem with mature companies is that the very commercial success of their products increases their dependency on them. Making radical changes in the product’s capabilities, underlying architecture or associated business models could cannibalize sales or lead to costly realignments of strategy and business infrastructure. It’s as though popular and widely adopted products become ossified, hardened by the inherent incentives to build on their own success. The result is that entrenched industry players are generally not motivated to develop or deploy disruptive technologies.” Tapscott, Don Wikinomics (New York 2006)

This project died along with many others we were inclubating. Intel’s main business is selling high volume products at HIGH margins. Selling high volumes at low-margins did not fit into its mainstream business. We couldn’t get management support to utiilze Xscale.

The groupthink at Intel is that it was X86-based or nothing. Unfortunately, we could have started with Xscale and migrated to the Atom processor long-term. Meanwhile, Amazon kept moving forward, but focusing on mature markets and pursuing “the Apple business model”: offering game-changing devices and business models to bring in fat profit margins while equipping the developed world with the coolest gadgets on the planet.

The Kindle is a knock-out success. They have 350K titles in the Kindle format. Of their physical book sales that also have a kindle format, the kindle version makes up 35% of those sales in less than two years on the market. Amazon and its Kindle have done to e-books/e-readers (which have been available for years) what the Apple Ipod did to MP3 players/downloadable music, and the Palm Pilot did to PDA’s.

But can this success trickle down to the BoP? Apple spends little time focusing on developing countries and under-served markets. In China, they are equipping all the international schools with Mac’s for every student. The annual tuition for these pre-K to 12 schools is well north of US$20K. When I asked my Intel colleague a few years ago what Apple’s BoP strategy was, the answer was: “they don’t have any.”

My worry is that Amazon goes that same way. The technology is out there and affordable to make the original vision of what we had at Intel happen. We just need a person or company with the disruptive leadership and social-passion to make this a reality.